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The New
A Financial Market System Perspective

Edited by Joanna Ledgerwood

with Julie Earne and Candace Nelson
On microfinance and The New Microfinance Handbook
“Financial services help to smooth cash flows, build assets, invest productively, and, importantly, man-
age risks. Increasing the outreach of financial services that are affordable and meet the varied needs of
poor women and men can contribute significantly to economic development and overall quality of life,
key objectives of practitioners and policy makers alike.”
—Maria Otero, former CEO, Accion International

“The journey from microfinance to financial inclusion began in earnest when we understood that cli-
ents need diverse services such as savings, payments, and insurance, as well as loans. The New
Microfinance Handbook reflects a lesson we learned many years ago—that sharing knowledge and best
practices is so important to help providers, policy makers, and others to continue to innovate, adapt,
and scale financial services in order to add real value to customers in a responsible way.”
—H.R.H. Princess Máxima of the Netherlands, The UN Secretary-General’s Special Advocate for
Inclusive Finance for Development (UNSGSA)

“The New Microfinance Handbook fills a critical gap in the current literature on financial inclusion. I am
particularly pleased with the explicit focus on consumers and their needs—this, together with the
onset of technology-based delivery models, has been the most important shift in the microfinance field
over the past 15 years. I am sure that by taking the financial ecosystem approach and compiling all the
current trends into one volume, this book will serve as a reference for the large and growing financial
inclusion community for years to come.”
—Brigit Helms, author of Access for All

“Financial services that support asset building, investment, and risk management are critical for people
of all ages in frontier and postconflict environments. In The New Microfinance Handbook, the authors
highlight the importance of understanding client needs and the need for a more inclusive financial
sector. This work provides an excellent resource for navigating a diverse and rapidly changing micro-
finance sector.”
—President Ellen Johnson Sirleaf, Liberia

“Poor people’s lives are complex; the goods, services and amenities that they need to escape from
poverty—and the means by which they get them—are equally diverse. One-size-fits-all solutions are an
illusion. Our challenge as development policy makers, researchers, and practitioners in all fields—be
that in finance, agriculture, health or education—is to understand and respond to this complexity in
ways that help build diverse, resilient socioeconomic systems that are able to serve the needs of the
poor, sustainably and at scale.
“The New Microfinance Handbook reflects this challenge. It moves beyond the original Microfinance
Handbook’s focus on retail microfinance to deal with the imperative of understanding and strengthen-
ing the wider financial ecosystem, which is essential to making financial markets genuinely work
better—inclusively and responsibly—for poor men and women. This shift has significant implications
for development agencies, requiring ‘smarter’ subsidies, different types of partners, and more facilita-
tive or catalytic interventions.”
—Robert Hitchens, Director, Springfield Centre, United Kingdom

The New
A Financial Market System Perspective

Edited by Joanna Ledgerwood

with Julie Earne and Candace Nelson
This Overview booklet contains the foreword, preface, introduction, and the table of contents from the forthcoming book,
The NewMicrofinance Handbook: A Financial Market System Perspective (doi:10.1596/978-0-8213-8927-0). To order copies of
the full-length book, published by the World Bank, please use the form at the back of this booklet.

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Attribution—Please cite the work as follows: Ledgerwood, Joanna, with Julie Earne and Candace Nelson, eds. 2013. The New
Microfinance Handbook: A Financial Market System Perspective. Washington, DC: World Bank. doi:10.1596/978-0-8213-8927-0.
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Foreword xv
Preface xvii
Acknowledgments xix
About the Authors xxi
Abbreviations xxiii
Introduction 1


Chapter 1. The Evolving Financial Landscape 15
Joanna Ledgerwood and Alan Gibson
Chapter 2. Clients 49
Stuart Rutherford, Daryl Collins, and Susan Johnson
Chapter 3. The Role of Government and Industry in
Financial Inclusion 71
Stefan Staschen and Candace Nelson
Chapter 4. The Role of Donors in Financial Inclusion 97
Mayada El-Zoghbi and Barbara Gähwiler
Chapter 5. Measuring Financial Inclusion and
Assessing Impact 113
Joanna Ledgerwood


Chapter 6. Community-Based Providers 149
Candace Nelson
Chapter 7. Institutional Providers 171
Joanna Ledgerwood

Contents of The New Microfinance Handbook v

Chapter 8. Savings Services 199
Joanna Ledgerwood
Chapter 9. Credit 213
Joanna Ledgerwood and Julie Earne
Chapter 10. Agricultural Finance 231
Calvin Miller
Chapter 11. Insurance 249
Craig Churchill
Chapter 12. Payment Services and Delivery
Channels 271
Joyce Lehman and Joanna Ledgerwood
Chapter 13. Beyond Products: Building Integrated
Customer Experiences on Mobile Phones 299
Ignacio Mas


Chapter 14. Monitoring and Managing Financial and
Social Performance 321
Joanna Ledgerwood, Geraldine O’Keeffe, and Ines Arevalo
Chapter 15. Governance and Managing Operations 351
Peter McConaghy


Chapter 16. Funding 379
Julie Earne and Lisa Sherk
Chapter 17. Regulation 413
Kate Lauer and Stefan Staschen
Chapter 18. Infrastructure and Outsourced Support Services 437
Geraldine O’Keeffe, Julie Earne, Joakim Vincze, and Peter McConaghy
Chapter 19. Building Inclusive Financial Markets 459
David Ferrand
Index 479

vi An Overview of The New Microfinance Handbook


When first published in 1998, Joanna Ledgerwood’s Microfinance Handbook was

an indispensible guide for donors, policy makers, and practitioners who were
working to expand access of the poor to microfinance. In the intervening years, the
opportunities and pressures of commercialization have driven a reassessment of
what microfinance is and whom it should serve. Today, in addition to building the
capacity and ensuring the sustainability of institutions, the larger microfinance
community is taking a closer look at the diverse needs of clients, the broader finan-
cial ecosystem, and the transformational nature of technology. This reassessment
has become a regular fixture of global conversations about poverty alleviation. 
The New Microfinance Handbook, then, is timely. The microfinance sector now
reflects the multidisciplinary intersection of finance, technology, and develop-
ment, where new ideas are changing the art of what is possible. The actors reflect
this diverse ecosystem and include everything from mobile operators to microfi-
nance institutions to community networks. This book has brought an impressive
array of the field’s experts to an area of practice in constant change.
We are pleased that this book asks the hard questions about what people living in
poverty really need. This means moving the conversation beyond the walls of insti-
tutions and into the complex worlds of clients. The needs of a rural farmer are differ-
ent from those of an urban microbusiness owner. A young woman embarking on a
life after school has different priorities than a mother seeking to protect the assets of
her family. For microfinance to deliver on its original promises, we need to put the
needs of persons living in poverty at the center of this work.
It is time for us to take stock of what we have learned as we move forward. The
New Microfinance Handbook will play an important role, helping us to advance our
understanding about how financial services can serve the diverse needs of the
Reeta Roy Tom Kessinger
President and CEO General Manager
The MasterCard Foundation Aga Khan Foundation

Foreword 1

Imagine a life without access to financial services: no deposit account, no debit card,
no fire insurance, no college savings plan, no home mortgage. Life would be an
incredibly stressful roller coaster ride, and most dreams would remain unfulfilled.
The day you get paid for work would be good, the other days rough. Any accident
would set your family back. Sending the kids to college? Too difficult. Buying a
house? Forget it. Nobody can pay for such needs out of cash accumulated under the
mattress. For us, life without access to financial services is unimaginable.
Yet according to 2011 data from the World Bank, an estimated 2.5 billion
working-age adults globally—more than half of the total adult population—have to
do exactly that. They live a life without access to the types of financial services we
take for granted. Of course, they cannot do without financial intermediation, so they
rely on age-old, informal mechanisms. They buy livestock as a form of savings; they
throw a village feast to cement local ties as insurance against a future family crisis;
they pawn jewelry to satisfy urgent liquidity needs; and they turn to a moneylender
for credit. These mechanisms are risky and often very expensive.
Increasingly robust empirical evidence demonstrates how appropriate finan-
cial services can help to improve household welfare and spur small enterprise
activity. Macro evidence also shows that economies with deeper financial inter-
mediation and better access to financial services grow faster and have less income
inequality. Policy makers and regulators worldwide recognize these connections.
They have made financial inclusion—where everyone has the choice to access and
use the financial services they need, delivered in a responsible fashion—a global
development priority.
A powerful vision of responsible financial market development is emerging—a
vision that aims to bank the other half of the global working-age adult population
by leveraging what we have learned from the microfinance story to date, using
advances in technology to spur product and business model innovation, and
encouraging new ways of thinking about how to create an enabling, risk-
proportionate regulatory and supervisory environment.

2 An Overview of The New Microfinance Handbook

The New Microfinance Handbook reflects the current frontier of our collective
thinking and experience. It starts with the need to understand the demand side.
Poor households in the informal economy are producers and consumers. They
need access to the full range of financial services to generate income, build assets,
smooth consumption, and manage risks. The global financial inclusion agenda rec-
ognizes these broader needs. It also recognizes the importance of financial literacy
that builds consumer financial capabilities and of consumer protection regimes
that take into account the conditions and constraints of poor families in the infor-
mal economy.
The Handbook also takes a broad look at the diversity of providers required to
meet these needs and at the business model challenges of different products. The
original microcredit revolution found an ingenious way to overcome the previous
obstacle to providing credit for the poor. How do you manage credit risk and
repayments at the local level when working with a segment of the population that
has no traditional collateral? The breakthrough was the joint-liability group loan—
social collateral to allow the poor to pledge for each other. But the business model
challenges are different for other financial services. For small-denomination sav-
ings and remittances, transaction costs must be ultralow; for insurance, risks must
be pooled and managed at an actuarially relevant scale; for pensions, micro contri-
butions must be invested in ways that generate adequate long-term returns.
Continued innovation in products and business models is needed so that we
can reach more people with a broader range of products at lower costs. No one
type of provider will be able to overcome the very different business model
challenges of all products. What is needed instead is a variety of financial service
providers that come together in a local-market ecosystem that works for the poor
at the base of the economic pyramid.
Lastly, the Handbook takes a fresh look at the enabling infrastructure and
regulatory environment. The infrastructure requirements range from a larger num-
ber of low-cost, physical access points in harder-to-reach geographic areas to
nationwide unique financial identities that facilitate consumer enrollment and pro-
tection. On the regulatory side, policy makers are recognizing that financial exclu-
sion poses a risk to political stability and impedes economic advancement, and they
are increasingly willing to balance the ultimately mutually reinforcing needs for
financial stability, financial integrity, and financial inclusion.
With a better understanding of demand, ongoing innovation in products and
business models to better meet that demand, and recognition of the need for a
protective and supportive enabling environment, I believe we have the knowledge
and the means to achieve full financial inclusion in our lifetime. Read on to learn
how this is already happening and what more is needed.

Tilman Ehrbeck
Consultative Group to Assist the Poor (CGAP)

Preface 3

Microfinance in 2013 widespread concern for “financial inclusion”5 is

directing attention to the broader “financial eco-
It has been 15 years since the original system” and how to make financial markets work
Microfinance Handbook (Ledgerwood 1998) was better for the poor. For example, a recent CGAP
written, and much has changed since then. Focus Note looks at the financial ecosystem
Microfinance is now a household term with within the context of the supply of financial ser-
frequent articles in the media about its growth, vices: “Different products present different risks
innovation, and impact. The industry has grown and delivery challenges, and it is unlikely that a
exponentially, in terms of both the number of cli- single class of service providers will effectively
ents as well as the number and type of providers provide all the products poor people need. A key
and products.1 The focus is no longer only on credit challenge is how to create the broader intercon-
for investment in microenterprises: Today there is
nected ecosystem of market actors and infra-
broad awareness that poor people have many and
structure needed for safe and efficient product
diverse financial service needs, which are typically
delivery to the poor” (Ehrbeck et al. 2012, p. 1).
met by a variety of providers through multiple
To this end, policy makers have begun to
financial services. We know this because data have
address financial inclusion in their economic
much improved in the past 15 years,2 allowing us to
agendas with the belief that access to financial
better understand barriers to access and use, and
services improves the ability of consumers to
we are beginning to examine impact.3
access markets, which contributes to monetizing
Over the years, the discourse has shifted
the values of products and services, enables risk
from  “microcredit” to “microfinance,”4 and now
pooling, and allows value storage, thus affecting

4 An Overview of The New Microfinance Handbook

economic growth and the overall stability of the expected increase in financial inclusion resulting
system. from the gradual substitution of donor funding
Increasingly, best practice in microfinance is with private sector capital has yet to happen. The
responsible finance, defined as the delivery of retail majority of poor people remain outside the main-
financial services in a transparent, inclusive, and stream financial sector, and many MFIs continue
equitable fashion (BMZ, CGAP, and IFC 2011). to depend on subsidies.
Consumer protection and financial capability are Looking forward, it appears likely that tech-
now seen as important policy objectives, particu- nology will enable customer touch points to pro-
larly in a context of new providers, more sophisti- liferate among nontraditional service providers.
cated products, and technology-enabled delivery The technology drivers of financial inclusion will
channels. Recent media attention to the significant come from innovations in mobile money, biomet-
profits made through initial public offerings of ric identity systems, smart phones, and wireless
microfinance banks6 have highlighted the need for broadband Internet access. At the same time,
transparent pricing and appropriate interest rates. however, much remains to be learned to effec-
Unlike 15 years ago, funding for microfinance tively increase outreach in a substantial way,
today is no longer the purview of donors alone. As including, for example, developing appropriate
of 2011 more than 100 microfinance investment regulatory frameworks for branchless banking
vehicles were managing close to US$7 billion models (Alexandre 2010). Further, it is vitally
(Symbiotics 2011), making private and quasi- important to better understand the social dimen-
private sector capital readily available. With the sions of how households manage financial
recognition that grant funding crowds out the resources, particularly in the informal sector, and
private sector, responsible donors have shifted the role of technology to work within these social
from providing funds for loan capital and operat- dynamics (Johnson 2012).
ing subsidies to more of a facilitation role Thus, the well-documented and widely
supporting the development of enabling environ- applauded achievements of microfinance are
ments, provision of information, and financial increasingly coupled with recognition of its lim-
infrastructure. itations and the need to take a more holistic view.
Although significant investments have been Concerns include the following:
made to reform regulatory systems to accommo-
• Outreach—In many countries outreach
date microfinance and transform microfinance
remains a small percentage of the population;
institutions (MFIs) into regulated institutions
only 41 percent of adults in developing econo-
complete with return-seeking investors, rela-
mies report having an account at a formal
tively few MFIs can absorb a significant amount
financial institution,8 8 percent report having
of capital. “However, the pool of investment-ready
originated a new loan from a formal financial
MFIs is small and is not expanding at the speed of
institution in the past 12 months, and 2 percent
the supply of equity investment. Indeed, 52 per-
report having personally paid for health insur-
cent of all foreign debt is channelled to only 25
ance (Demirgüç-Kunt and Klapper 2012);
MFIs, out of a total of 524 MFIs that receive for-
more than half the world’s adult population
eign debt finance. At the country level, foreign
does not use formal or semiformal services,
investment is, to a large degree, still focused on a
nearly all of whom live in Africa, Asia, and
small number of countries in LAC and ECA7 with
Latin America (Chaia et al. 2009).
only moderate levels of financial exclusion”
(Reille et al. 2011, p. 10). Given the concentration • Sustainability—Although figures are not pre-
of investment in relatively few institutions, the cise, many microfinance operations continue

Introduction 5
to receive subsidies; commercial funding is might challenge this assumption, and are thus
highly concentrated in Latin America and beginning to invest much more in assessing
Eastern Europe, while most of the world’s impact, if we just look at access figures, how has
poor (less than US$2/day) live in Asia and microfinance fared? Despite several decades of
Africa (Wiesner and Quien 2010). Beyond significant investments in the sector, access to or
direct microfinance operations, many other usage of formal financial services remains low,
activities important in the microfinance sys- particularly in Sub-Saharan Africa (SSA) (see
tem (for example, training, product develop- figure I.1). Data from the World Bank Global
ment, and technical advice) are often Findex database (Demirgüç-Kunt and Klapper
subsidized. 2012) shows that in SSA only 13 percent of indi-
viduals aged 15 years and older saved at a finan-
• Impact—Recent research based on random- cial institution in the last 12 months, and only 5
ized controlled trials (RCTs) has found the percent received a loan from a financial institu-
impact of microcredit to be mixed. RCTs have tion. Such low usage does not, however, indicate
shown that increases in consumption and weak demand; at the same time, 19 percent saved
business investment do not always correlate in a savings club, and 40 percent received a loan
with measures of poverty reduction (O’Dell from family or friends in the past year. In South
2010). Furthermore, the distribution of gains Asia figures are similar, with 11 percent saving in
is uneven. The broader effect of microfinance a financial institution in the last 12 months and 9
on poverty is limited by low levels of usage percent receiving a loan from a financial institu-
and persistent barriers to inclusion (Johnson tion.10 And yet the massively popular Self-Help
and Arnold 2011). Group movement in India counted 97 million
households affected by March 31, 2010.11 But
At the heart of these concerns over the efficacy even this indication of participation is weak
of microfinance is a better understanding of how when compared to the potential market of the
the poor need and use financial services. Research 900 million households in India that live on less
(Collins et al. 2009; Demirgüç-Kunt and Klapper than US$2 a day (Chen et al. 2010).
2012) has revealed that the poor manage their One reason for low outreach is the traditional
financial lives with complex strategies that utilize microfinance business model itself, which is
multiple forms of savings, lending, and bartering based on generating revenue from primarily pro-
from a mix of formal and informal providers. ductive loans and other fee-based services to
Achieving financial inclusion for the poor thus cover costs. Yet in microfinance, costs are high,
cannot rely on MFIs alone; rather, it requires and the revenue base is relatively low. This is
improving the quality and frequency of services especially true for the rural poor whose limited
from a multitude of provider types and fully investment opportunities and capacity for debt
understanding client behavior and how it affects translate into lower revenue for MFIs and banks
financial service needs. who may lack the incentives, information, and
sometimes ability to mitigate perceived risks of
operating beyond urban markets or with very
Measuring Progress
poor clients. Thus it is important to focus on low-
At the time of the original Handbook, a broadly ering costs both for institutions to provide ser-
accepted assumption was that “increased vices and for clients to use them. And although
access” and a “willingness to pay” provided a technology will continue to push this frontier,
good proxy for impact.9 Although today we access figures alone may offer a misleading view

6 An Overview of The New Microfinance Handbook

Figure I.1 Financial Access Strandsa—Country Comparisons (July 2012)

RSA'11 63 5 5 27
Namibia'11 62 3 4 31
Swaziland'11 44 6 13 37
Botswana'09 41 18 8 33
Lesotho'11 38 23 20 19
Ghana'10 34 7 15 44
Nigeria'10 30 6 17 47
Zimbabwe'11 24 14 22 40
Kenya'09 23 18 26 33
Uganda'10 21 7 42 30
Malawi'08 19 7 19 55
Rwanda'08 14 7 26 53
Zambia'09 14 9 14 53
Tanzania'09 12 4 28 56
Mozambique'09 12 1 9 78
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Banked Other formal non-bank Informal only Excluded

Source: FinMark Trust.

Note: a. The formal sector is divided into a “banked” segment (the percentage of adults with a bank account), and a formal “other”
segment (the percentage of the adult population with a formal financial product, such as insurance or a microfinance loan, but no
bank account). Together, these two groups are defined as formally included. The informal sector comprises all the organizations that
provide financial services but are not legally registered to do this business, for example, savings clubs, burial societies, and money-
lenders. The informally serviced category in the access strand represents the percentage of adults with an informal product but with
no bank account or a product from another formal financial institution. It is necessary to add the informal segment to the formally
included segment to derive the percentage of the adult population that is financially served. Anyone who is not financially served is
financially excluded, which means they are not using financial products (formal or informal) to manage their financial lives; for exam-
ple, they may simply be using cash. See

of benefits; increased access and more choice do improvement in access does not develop in a
not automatically translate into effective client competitive manner, benefits may be restricted.
use. For example, the major growth in access for Clients with limited information and/or choices
saving services through the Mzansi account in may not be able to exert competitive pressure on
South Africa disguised a large number of dormant providers to improve services.
accounts, opened but often unused, because cli- Providers and other stakeholders need to take a
ents either found better options for their needs or more proactive approach that recognizes the diver-
were too poor to utilize the account.12 The path sity of barriers to access, the heterogeneity of
from uptake (that is, opening an account) to usage consumers, and the variety of financial service
is still an uncharted course. needs among various lower income segments and
Growth in access, especially if accompanied by underserved or excluded groups. Looking for major
access to more diverse services, may require cli- impact from a single product or institution type
ents with greater financial capabilities to ensure risks overlooking the inherent complexity of liveli-
effective usage and benefits. As in any market, if hoods and financial service needs (see box I.1).

Introduction 7
Box I.1 A Market This Big Needs Many Types of Providers

Back in 1982, when Citi made its first loan to a population is unbanked. This is too big a seg-
nongovernmental organization (NGO), the mi- ment to cover with just one or two approaches
crofinance world was much simpler. There and institutional forms. We have the ultra-
were the few global networks, and we were poor and displaced people at one end of the
still using the term “microcredit.” It was a scale, and the very economically active peo-
much more focused, smaller community. The ple who might even be employed on the other
industry has grown tremendously since then. end. Their needs are different.
From a few million clients in the 1980s, I get concerned with some of the ar-
microfinance now reaches more than 190 guments that take place in microfinance to-
million families. We have seen tremendous day. It seems like there is an underlying as-
growth in the size of microfinance organiza- sumption that there is only one type of
tions and the scale of their operations, but we microfinance client and that client should be
are also seeing that there is a price for grow- served by only one type of institution—when
ing too fast—in any industry. You can grow the opposite is true. There are many different
only so fast before burning out the staff, or client segments in microfinance, and MFIs
you cannot bring on well-trained new staff to would do better to focus on each segment to
keep up with your growth. develop the best business models to serve
Most of this growth has come from organi- those clients.
zations offering only one or two credit prod- In the next few years, the innovation needs
ucts. The demand, the need, and perhaps the to be in designing products that fit who clients
model lent itself to consistent growth be- are and what they want to become; we get
cause it stayed very focused. However, fast there by getting to know the clients, their
growth of organizations using similar models needs, their cash flows and their aspirations
and strategies in the same locations has led, much better.
in some cases, to multiple loans to the same Within this microfinance ecosystem, we
borrower and a breakdown of lending disci- need some institutions to work with the very
pline. We see these issues in Andhra Pradesh difficult-to-reach and vulnerable communities,
in India where institutions’ client-base over- delivering social output of a very high calibre,
laps are putting a lot of pressure on and they cannot then be devoted just to
repayments. achieving scale and even full sustainability.
How do you provide financial access to the Their objective may never be to become a
vast majority of the population? It will take finance company, yet they may use financial
more than NGOs and commercial banks—we tools as one of the enablers toward progress
need cooperatives, credit unions, and postal out of poverty along with health and education
savings banks. We need cell phone compa- training.
nies that can make loan payments. We see Even as one part of microfinance becomes
opportunities for many different services and more commercial, we have to keep thinking
types of providers. about the many vulnerable, underserved,
In most of the countries where we work, complicated communities that mainstream
anywhere from 60 to 80 percent of the microfinance may not yet be able to reach.
Source: Bob Annibale of Citibank, writing in Reed (2011). Reprinted with permission.

8 An Overview of The New Microfinance Handbook

Redefining Objectives proposition (see box I.2). “While the language
changed with insights and expanded horizons,
At the time of writing the original Handbook, the
the underlying fundamental idea has remained
predominant microfinance model was an NGO
the same: Help poor families in the informal
MFI providing credit to microentrepreneurs for
economy realize their economic potential and
investment in microenterprises. This model was
give them the financial services means to manage
largely based on the belief that access to credit for
their lives that most of us in the North take for
productive investment would support entrepre-
granted” (Ehrbeck 2012).
neurship and economic development, empower
Greater financial inclusion thus requires
women, and alleviate poverty by generating
addressing constraints and taking advantage of
higher incomes and employment. However,
opportunities in the financial ecosystem.
increasing evidence of the impact of microfi-
Stakeholders are now beginning to focus on the
nance, particularly microcredit, indicates that it
diversity of clients (geography, income levels,
has some effect on the expansion of business and
livelihoods, gender, life-cycle) and their needs
increased profits, very little effect on women’s
(growth, cash management, risk mitigation), as
empowerment, and virtually no effect on poverty
well as the wide range of financial services (credit,
alleviation (O’Dell 2010).
savings, payments, insurance), financial service
Fifteen years later, the shift to financially
providers (informal, MFIs, cooperatives, banks,
inclusive systems, based in part on better under-
insurance companies), and delivery channels
standing impact, appropriately broadens the
(branches, agents, mobile phones) to meet these
objectives beyond economic development and
needs. They are paying attention to the effective-
poverty alleviation to include the ability of poor
ness (social performance/impact, transparency,
women and men to better manage risks, smooth
and client protection) of financial services as well
income, invest in productive activities, and build
as the knowledge and skills that clients need to
assets. These broader objectives demand more of
use them (financial capabilities); the rules that
stakeholders in terms of better understanding cli-
guide financial markets (regulations, standards,
ents and, in turn, delivering an improved value
norms); the financial infrastructure (payment

Box I.2 Latest Findings from Randomized Evaluations of Microfinance

“The overall message from this body of work that allow it to view poor customers as individ-
is that poor people face various limits, and uals. Some of those individuals will leverage
their ability to capitalize on opportunities var- financial services to smooth consumption;
ies greatly. … [N]ot all borrowers want to some to manage risk; some to make invest-
grow a business. The variable results seen can ments they have the skill and resources to
be as much a function of borrower intent as profit from; some will do all of the above. With
borrower ability. A one-size-fits-all product will a view of serving all of these needs, microfi-
not bring benefit to the borrowers or profit to nance providers may evolve a new generation
the providers. Instead, the microfinance in- of improved services and products that reli-
dustry needs to continue to mature in ways ably and flexibly help poor people.”
Source: Bauchet et al. 2011.

Introduction 9
systems and credit bureaus) required to support providers, students and academics, and consul-
well-functioning markets; and the information tants and trainers.
services necessary to inform all stakeholders to Although this book is in part an update of the
better improve the system. This book attempts original Handbook, the growth of the sector and
to address all of these issues with the objective to the complexity of the financial market system
promote financially inclusive ecosystems that have led to a perspective much broader than the
work better for the poor. previous “financial and institutional perspective.”
As a result, additional chapters have been added
to address issues more relevant than when the
About This Book
original Handbook was written. To reflect this
Given the importance of both understanding and complexity, we invited a number of experts to
appreciating the complexities of financial ser- write many of the new chapters. In addition,
vices for the poor, the New Microfinance Handbook given that this book does not go into as much
takes a different approach from its predecessor. detail as the previous book did, a list of key
In contrast to the “institutional” perspective resources at the end of each chapter provides
(supply side) of the original Handbook, this book readers additional information on specific topics.
considers first and foremost clients and their Finally, although the title still uses the term
needs (demand side) and how the market system microfinance, the book very much addresses the
can work better to meet these needs. It also wider financial ecosystem, moving beyond the
attempts to address the rules and supporting traditional meaning of microfinance to inclusive
functions required for financial markets to work financial systems.
well and serve ever greater numbers of poor con-
sumers. The result is a book that is less of a
Book Structure and Content
“how-to” guide but rather a description of the
financial market system and the functions within The New Microfinance Handbook loosely follows
it and how they work, or do not work, in serving the framework of the original Handbook and is
the needs of the poor. The objective is to provide organized into five parts:
a strategic guide to help assess the varied finan-
Part I: Understanding Demand and the
cial service needs of poor people, and to then pro-
Financial Ecosystem
pose how a diversified financial sector can address
these needs in an accessible and beneficial man- Part II: Financial Service Providers
ner. Ultimately it is hoped the book will contrib-
Part III: Financial Services and Delivery Channels
ute to greater access to and usage of financial
products and services that genuinely meet the Part IV: Institutional Management for Scale and
many needs of the poor through various sustain- Sustainability
able market-based financial service providers.
Part V: Supporting Financial Inclusion
The New Microfinance Handbook provides a
primer on financial services for the poor. It is Part I—Understanding Demand and the
written for a wide audience, including practi- Financial Ecosystem updates Part I of the original
tioners, facilitators, policy makers, regulators, Handbook and addresses big picture issues—the
investors, and donors working to improve the financial landscape, clients, and strategies to
financial system, but who are relatively new to achieve and measure financial inclusion. Given
the sector. It will also be useful for telecommu- the changing landscape of the financial services
nication companies and other support service sector, the book opens with Chapter 1—The

10 An Overview of The New Microfinance Handbook

Evolving Financial Landscape, written by Joanna Providers, written by Joanna Ledgerwood,
Ledgerwood and Alan Gibson, outlining three key describes financial service providers that are
influences in financial services for the poor that more formal in nature. This grouping includes a
are greatly affecting the way the sector is moving: wide variation of provider types, differing in the
a renewed focus on clients, acknowledgment of services they provide as well as their ownership
the wider financial ecosystem, and the potential structures, regulatory status, geographic focus,
of technology. Chapter 2—Clients builds on the target markets, and objectives, but are similar in
centrality of clients and financial management. that they have a more concrete structure than
Drawing from Portfolios of the Poor (Collins et al. providers in the informal sector and are thus
2009), authors Stuart Rutherford, Daryl Collins, referred to as institutions.
and Susan Johnson examine the financial service Parts I and II are the least technical parts of
needs of poor people and how these needs are the handbook; they require no formal back-
met. Chapter 3—The Role of Government and ground in microfinance or financial theory. They
Industry in Financial Inclusion, written by Stefan will be of most interest to donors, policy makers,
Staschen and Candace Nelson, addresses how key students, and those interested in understanding
players promote financial inclusion, from the role financial inclusion and the actors involved.
of government as policy maker and legislator, to Part III—Financial Services and Delivery
industry as it warms to responsible finance Channels expands on the original Handbook’s
through self-regulation and the need for coordi- discussion of savings and credit with new chap-
nation. Chapter 4—The Role of Donors in Financial ters on agricultural finance, insurance, and pay-
Inclusion, written by Mayada El-Zogbhi and ment services. It also addresses the many
Barbara Gähwiler, focuses on the changing role of alternative channels that are beginning to show
donors in microfinance and proposes ways to promise and includes a thought provoking chap-
facilitate the market to work better for the poor. ter on supporting the poor through financial plan-
Given that financial inclusion is on the agenda of ning tools. Chapter 8—Savings Services, written by
many policy makers, much attention has recently Joanna Ledgerwood, considers the various sav-
been invested in measuring it and assessing the ings products demanded by the poor and touches
impact of using financial services. Supply and on the institutional capacity required to offer
demand-side studies, impact assessment, and deposit services. Chapter 9—Credit, written by
other rigorous research are addressed by Joanna Joanna Ledgerwood and Julie Earne, looks at
Ledgerwood in Chapter 5—Measuring Financial pricing loans and types of credit products includ-
Inclusion and Assessing Impact. ing traditional working capital and fixed asset
Part II—Financial Service Providers updates loans, as well as newer products such as housing
the original chapter 4 (The Institution), adding loans and leasing. Chapter 10—Agricultural
an additional chapter to acknowledge the numer- Finance, written by Calvin Miller, acknowledges
ous and varied providers in the informal sector. the substantial need for financial services for peo-
Chapter 6—Community-Based Providers, written ple working in the agricultural sector (the vast
by Candace Nelson, describes indigenous infor- majority of the poor) and the ways in which finan-
mal providers, for example, moneylenders, cial products and delivery channels cater to meet
deposit collectors, rotating savings and credit these needs. Although in the original Handbook
associations and mutual aid groups such as burial insurance was only briefly mentioned, in this
societies, and other providers such as Self-Help edition, given the growing importance of micro-
Groups and Savings Groups that are facilitated insurance in financial inclusion and acknowledg-
by external agencies. Chapter 7—Institutional ment of the risk management needs of poor

Introduction 11
women and men, Chapter 11—Insurance, written Part V—Supporting Financial Inclusion is new
by Craig Churchill, looks at the demand for micro- and includes four chapters that focus on the
insurance, product characteristics, and delivery roles and functions of various stakeholders sup-
mechanisms. Chapter 12—Payment Services and porting and promoting the overall financial eco-
Delivery Channels, written by Joyce Lehman and system. Chapter 16—Funding, written by Julie
Joanna Ledgerwood, describes transaction ser- Earne and Lisa Sherk, considers the significant
vices such as money transfers and payments as role investors play in providing capital to finan-
products in and of themselves, as well as the vari- cial service providers. Given the growth in the
ous channels for delivering financial services. In number and diversity of providers, Chapter 17—
particular, this chapter considers the different Regulation, written by Kate Lauer and Stefan
ways in which clients access services through Staschen, addresses the laws and regulatory
branchless touch points and the significant role frameworks in place to support proper oversight
played by agent networks. Chapter 13—Beyond and safety of the financial market system and the
Products, written by Ignacio Mas, proposes the various players. Chapter 18—Infrastructure, writ-
delivery of financial products as an integrated ten by Geraldine O’Keeffe, Julie Earne, Joakim
customer experience through mobile phones. Vincze, and Peter McConaghy, considers the sup-
Part III will be of most interest to practition- porting functions required for well-functioning
ers who are developing, modifying, or refining financial markets such as credit bureaus, deposit
their financial products, as well as donors or insurance, clearing and settlement systems, and
consultants who are evaluating financial ser- unique identification systems. Outsourced ser-
vices for the poor and want to better understand vices such as “software as a service,” training, and
financial products and services and ways to security are also described. Chapter 19—Building
deliver them. Inclusive Financial Markets, written by David
Part IV—Institutional Management for Scale Ferrand, uses the market system framework to
and Sustainability includes two chapters and pro- discuss the roles development agencies can and
vides an update of the original chapters on MFI should play to contribute to financial systems
management. Chapter 14—Monitoring and that work more effectively for the poor, high-
Managing Financial and Social Performance, lighting the different functions of market actors
written by Joanna Ledgerwood, Geraldine (service providers with ongoing roles) and those
O’Keeffe, and Ines Arevalo, addresses core bank- facilitating the market (donors and other devel-
ing systems and financial and social performance opment agencies with a temporary role).
management. Chapter 15—Governance and Part V will be of most interest to those either
Managing Operations, written by Peter providing or supporting the development of
McConaghy, looks at various facets of institu- mesolevel functions in the financial ecosystem.
tional providers including governance, human
resource management, product management, and
risk management. Part IV is more technical than Notes
previous parts of the Handbook. Although specific
 1. Total numbers are difficult to find, but David
institutional performance is somewhat less Roodman in “Due Diligence—An Impertinent
important given the client and financial system Enquiry into Microfinance” (2011, p. 67)
focus of this book, Part IV is included for the ben- estimates there were close to 180 million loans
efit of practitioners and/or funders interested in outstanding and 1.3 billion savings accounts at
the operations and performance of institutions “alternative financial institutions” in 2000 and
providing financial services to the poor. “microfinance has grown a lot since then.”

12 An Overview of The New Microfinance Handbook

 2. For example, national-level FinMark Trust’s credibly) can be difficult and expensive.
FinScope surveys,, and Addressing this dilemma, there is a school of
Global Findex databases, http://data.worldbank thinking that advocates certain ‘proxies’ for
.org/data-catalog/financial_inclusion. impact. Otero and Rhyne have summarized
 3. For example, see Financial Access Initiative recent microfinance history by saying that
(FAI),; Abdul Latif there has been an important shift from
Jameel Poverty Action Lab (J-Pal), http:// focusing on the individual firm or client of; and financial services to focusing on the
Innovations for Poverty Action (IPA), http:// institutions providing services. This financial systems approach ‘necessarily relaxes its
 4. Microfinance as defined by CGAP in CGAP attention to “impact” in terms of measurable
Occasional Paper 15, “The New Moneylenders: enterprise growth and focuses instead on
Are the Poor Being Exploited by High measures of increased access to financial
Microcredit Interest Rates?” (Rosenberg et al. services’ (Otero and Rhyne 1994).”
2009), “usually refers to the provision of 10. Account at a formal financial institution
financial services to poor and low-income denotes the percentage of respondents with an
clients who have little or no access to account (self or together with someone else) at
conventional banks. The term is often used in a a bank, credit union, another financial
more specific sense, referring to institutions that institution (for example, cooperative or
use new techniques developed over the past 30 microfinance institution), or the post office (if
years to deliver microcredit—tiny loans—to applicable) including respondents who
informal microentrepreneurs. The range of reported having a debit card (Demirgüç-Kunt
services can include not only microcredit but and Klapper 2012).
also savings, insurance, and money transfers.” 11.
 5. The ACCION Center for Financial Inclusion 12. E-mail exchange with Gerhard Coetzee, April
defines financial inclusion as “Full financial 4, 2012, and Bankable Frontiers Associates
inclusion is a state in which all people who (2009).
can use them have access to a full suite of
quality financial services, provided at
affordable prices in a convenient manner, and References
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are delivered by a range of providers, Room for Experimentation with Banking
most of them private, and reach everyone beyond Branches.” Global Savings Forum, Bill &
who can use them, including disabled, Melinda Gates Foundation, Seattle, WA,
poor and rural populations” (www November. Bankable Frontier Associates. 2009. “The Mzansi
 6. See Bank Account Initiative in South Africa, Final
11376809 for information on the Compartamos Report.” Commissioned by FinMark Trust.
Banco IPO. Somerville, MA, March.
 7. Latin America and the Caribbean (LAC) and Bauchet, Jonathan, Cristobal Marshall, Laura
Europe Central Asia (ECA). Starita, Jeanette Thomas, and Anna Yalouris.
 8. Defined as “a bank, credit union, cooperative, 2011. “Latest Findings from Randomized
post office, or microfinance institution” Evaluations of Microfinance.” Access to Finance
(Demirgüç-Kunt and Klapper 2012). Forum, Reports by CGAP and Its Partners No. 2.
 9. In chapter 2 of the Microfinance Handbook CGAP, Washington, DC, December.
(Ledgerwood 1998, p. 49) Tom Dichter wrote, BMZ, CGAP, and IFC. 2011. “Advancing
“Doing impact analysis well (and therefore Responsible Finance for Greater Development

Introduction 13
Impact: A Stock-Taking of Strategies and Johnson, Susan, and Steven Arnold. 2011.
Approaches among Development Agencies and “Financial Exclusion in Kenya: Examining the
Development Finance Institutions.” Changing Picture 2006–2009.” In Financial
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Maria Jose Gonzalez, Jonathan Morduch, and Bank of Kenya.
Robert Schiff. 2009. “Half the World Is Ledgerwood, Joanna. 1998. Microfinance
Unbanked.” Financial Access Initiative Handbook: An Institutional and Financial
Framing Note. Financial Access Initiative, Perspective. Washington, DC:
New York. World Bank.
Chen, Gregory, Stephen Rasmussen, Xavier Reille, O’Dell, Kathleen. 2010 “Measuring the Impact of
and Daniel Rozas. 2010. “Indian Microfinance Microfinance: Taking Another Look.” Grameen
Goes Public: The SKS Initial Public Offering.” Foundation, Washington, DC.
CGAP Focus Note 65, CGAP, Washington, DC, Reed, Larry R. 2011. “The State of the Microcredit
September. Summit Report 2011.” Microcredit Summit
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Rutherford, and Orlanda Ruthven. 2009. Reille, Xavier, Sarah Forster, and Daniel Rozas.
Portfolios of the Poor: How the World’s Poor 2011. “Foreign Capital Investment in
Live on $2 a Day. Princeton, NJ: Princeton Microfinance: Reassessing Financial and Social
University Press. Returns.” Focus Note 71, CGAP, Washington,
Demirgüç-Kunt, Aslı, Thorsten Beck, and Patrick DC, May.
Honohan Beck. 2007. “Finance for All? Policies Roodman, David. 2011. “Due Diligence—An
and Pitfalls in Expanding Access.” Policy Impertinent Enquiry into Microfinance.”
Research Report, World Bank, Washington, DC. Center for Global Development, Washington,
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Washington, DC. Luxembourg, December.

14 An Overview of The New Microfinance Handbook


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The original Microfinance Handbook provided a very useful guide for practitioners and students
of development finance. Since that book was published in 1998, there have been concentrated
efforts to broaden outreach to meet the diverse financial service needs of clients. The New
Microfinance Handbook brings together leading industry thinkers and organizes their ideas
into a concise reference for all development finance stakeholders. The book methodically
outlines all the considerations for increasing financial inclusion, with a particular focus
on understanding the needs of poor households.

“We have used the original Microfinance Handbook for years as a core text for our training programs,
and this second edition is even more complete. Joanna and the authors have done a thorough updating
of all the sections. Its new sections reflect the progress in the field, moving beyond credit and savings
into microinsurance, money transfers, and payments systems. The Handbook continues to be the best
single source compendium on the ‘how to’ of financial services for the poor, and I recommend it highly.”
Robert Peck Christen, President, Boulder Institute of Microfinance, and Professor of Practice,
Maxwell School of Citizenship and Public Affairs, Syracuse University

“In the midst of all the jargon about financial inclusion and financial ecosystems, it is very helpful to
have a clear and thoughtful description of the various pieces, and of how they fit together, as a basis of
understanding and of action. The New Microfinance Handbook provides this basis. The new edition
shows how far systemic thinking about the role of microfinance in the financial system has come.”
David Porteous, Managing Director, Bankable Frontier Associates

“Microfinance has experienced a wave of new thinking in the past decade, with a sharpened focus on the
financial needs of households rather than only enterprises. The New Microfinance Handbook introduces
readers to the most important ideas and shows how these ideas can be turned into action. If you work
in microfinance, this book should be high on your reading list.”
Jonathan Morduch, Professor of Public Policy and Economics, New York University, and co-editor
of Banking the World: Empirical Foundations of Financial Inclusion

“This is a book that will become an important part of the history of finance. The New Microfinance
Handbook documents and analyzes the extensive expansion and depth of our knowledge of demand-
driven products and services, and of our understanding of the institutions that make these work.
Discussions of recent advances, innovations, and breakthroughs in the industry include the importance
of enabling environments; results from new research on supply and demand; the experiences of, and
huge potential for, mobile banking; and many others. Written for a wide audience on a crucial
topic affecting most of the people in the world, this book is both profound and enjoyable.”
Marguerite S. Robinson, author of The Microfinance Revolution